Whose house is it anyway?

There is much talk of a slowdown in India���s housing markets and a fall in home prices due to increasing cost of building materials like steel and cement and increasing interest rates. Nevertheless, with the advantages bestowed by homeownership, a dream of the Indian consumer is to own a home. Hence it is a question worth asking whether Indian home buyers are getting value for their money, when compared with their counterparts in other countries.

Hedonic models of housing show that home and neighbourhood characteristics are and ideally should be reflected in the property value. For instance, the simplest model shows that keeping other factors constant, a three bedroom house is worth more than a two bedroom house, assuming higher square footage. This is valid in India���s property markets as well. However, in other housing markets, typically, a house is viewed as a bundle of characteristics, which include accessibility, quality of schools, walking space, safety, availability of public transport, each of which has some value in itself.

What actually matters in India���s housing markets for prices is economic stratification and location. We can be sure that there are ���posh��� localities, ���slums,��� or middle-income neighbourhoods. This also seems to be the basis for local governments to fix tax slabs for various localities. For instance, various cities in which the unit area method is applicable, assess property on the basis of age and structure of building, size (in terms of square footage) and other characteristics of the building. Further, there is a location premium. Properties that are closer to the central city or some business/employment centre, command a higher price, other things remaining constant. Properties which are far away from business centres command a lower premium.

However, consider some other characteristics: accessibility, crime rates, and the tax rate-public services package. When these are taken into account, India���s property markets are disappointing. For instance, with some exceptions, the value of a house that has quite poor access (in terms of roads) is the same as (sometimes higher than) another house which has good road access, holding constant other factors such as age, and square footage. Further, a property located in an unsafe area is valued the same as one located in a safe neighbourhood. One would expect that the property located in the safe neighbourhood would be valued at a higher price than that in an unsafe neighbourhood. Homebuyers oblivious of these characteristics or are unable to discern these differences, buy homes just because they have the purchasing power to do so.

However, the complete bundle of characteristics is fully reflected in the property value in American housing markets. For instance, there, a property which is located in ���run-down��� areas cost less; those which have good access to roads and public services such as schools cost more. Homes in school districts with good schools are valued higher. Further, properties located in high tax-poor public service neighbourhoods cost less, as homebuyers vote with their feet.

An important contributing factor to the differential pricing of homes across localities (both in American and Indian markets) is the role of the real estate agent who artificially inflates the price of a given house to accommodate his margins into the value of the house, irrespective of its characteristics. This way, the actual market value of the property becomes obfuscated.

However, why is it the case that certain characteristics are not reflected in property values in the Indian market, whereas they are reflected in the American market? One reason for such differences is cultural. While Americans are conscious of safety (distinguishing between crime-prone and safe neighbourhoods), and differences in public services (as for instance, between paved and unpaved roads), we have not yet learned to be conscious about safe and unsafe neighbourhoods, good and bad road access, hence these characteristics are not reflected in property values.

What are the implications for consumers, homebuyers and homeowners of these problems in Indian housing markets? Indian homebuyers get a raw deal. They are required to make huge investments in properties that do not have good road access, are in unsafe neighbourhoods (in the sense of incidence of robbery) and are at the receiving brunt of high local taxes.

Given that property owners pay the property tax to the local government, the local government is responsible for providing good quality public services. In other words, localities in which the property tax rate is high need to provide good access roads, if this is not true, then it has to be reflected in a low property value. Such nuances do not enter the house price in the Indian housing market. Real estate brokers should be prevented from imposing a huge margin on the actual value of property so that its actual market value is not obfuscated.

What needs to be done? The ministry of urban development (MOUD) has made a start by specifying that real estate developers should distinguish between the carpet area, built-up and super built-up area, and that carpet area be used as the basis of realty valuation. In order to prevent speculation, the ministry has specified that construction on vacant land should take place within a stipulated period after land has been bought. The National Housing Bank has come up with the idea of a ���Residex��� to fill the void created by an absence of a relevant benchmark in the housing market, so that buyers and builders get an idea regarding demand and price movements of different types of houses in various cities and localities. These initiatives are steps in the right direction, but are not enough.

The MOUD needs to appoint a regulator for this sector similar to Trai (Telecom Regulatory Authority of India) for telecom, NPPA (National Pharmaceutical Pricing Authority) for pharmaceuticals, and Irda (Insurance Regulatory and Development Authority) for insurance. Such a regulator should ensure that homebuyers are not exploited by real estate developers and agents. It should guarantee that public services, efficiency of the local government, and safety are fully reflected in the property price. We need to have enlightened local governments, regulators and homebuyers for better homes and better quality of living.

(The author is Ford public affairs fellow, Public Affairs Centre, Bangalore. Views are personal.)